Martin Midstream Partners: Debt Reduction Efforts Reduce Leverage Below 4.0x (NASDAQ:MMLP)

Martin Midstream Partners L.P. (NASDAQ:MMLP) reported $26.2 million in adjusted EBITDA in Q3 2023 and reaffirmed its full-year guidance for $115.4 million in adjusted EBITDA, excluding the impact of its exit from the butane optimization business.

Martin’s transportation business underperformed a bit as demand from specialty industrial customers slowed. This was made up with stronger results from its Specialty Products and Sulfur Services divisions.

I looked at Martin back in July and believed that it could reduce its debt to approximately $470 million by the end of 2023. It looks admire Martin’s debt reduction should be better than I expected, and I now think it will finish 2023 with around $445 million to $450 million in debt. This is due to Martin generating more proceeds from the selloff of its butane inventory than I had modeled, as well as some of its 2023 capex being deferred into 2024.

The capex deferral is due to some delays with its electronic-level sulfuric acid facility, which will reduce the impact that facility will have on Martin’s 2024 results.

Martin’s faster debt reduction increases its estimated value to around $6 per unit with a 5.5x EV to EBITDA multiple, although its value would be around $4.50 per unit instead of a more conservative 5.0x multiple. The high end of that range has increased from my prior $5.70 per unit assess, reflecting Martin’s progress with debt reduction.

Q3 2023 Results

Martin delivered adjusted EBITDA of $26.2 million in Q3 2023, which was basically in line with its guidance for $25.1 million in adjusted EBITDA for the quarter.

For Q3 2023, Martin’s Specialty Products segment outperformed guidance, generating $6.8 million in adjusted EBITDA compared to guidance for $5.2 million in adjusted EBITDA. Martin’s Sulfur Services segment also did well, generating $5.4 million in adjusted EBITDA versus guidance for $3.1 million in adjusted EBITDA. Martin’s Transportation segment only generated $9.5 million in adjusted EBITDA compared to guidance for $12.0 million in adjusted EBITDA though.

Click to enlarge

Martin indicated that its land transportation business ended up with 8% less miles driven than expected in Q3 2023, with demand from its specialty industrial customers slowing.

Martin has reaffirmed its full-year guidance for $115.4 million in adjusted EBITDA, excluding the impact of its exit from the butane optimization business. The exit of the butane optimization business resulted in a negative $15.1 million impact on adjusted EBITDA.

Martin previously expected $27.9 million in adjusted EBITDA for Q4 2023, but now expects $26.9 million in adjusted EBITDA in that quarter so that its full-year expectations remain unchanged. It tweaked its Q4 2023 guidance to account for some weakness in its land transportation business.

Debt Situation

Martin reduced its debt by approximately $54 million during the first three quarters of 2023, aided by its selloff of butane inventory as a result of its exit from the butane optimization business.

Martin now has $462.5 million in outstanding debt as of the end of Q3 2023 and may be able to reduce this to around $445 million to $450 million by the end of 2023. This would leave Martin with leverage of approximately 3.9x at the end of 2023.

Martin expects its Q4 2023 capex to be around $11 million and has reduced its 2023 capex expectations by around $5 million. Some spending related to its electronic-level sulfuric acid facility joint venture has been pushed to 2024.

Martin may then be able to reduce its debt to around $425 million by the end of 2024, resulting in leverage of approximately 3.6x.

Notes About Joint Venture

Martin noted that the completion of its joint venture electronic-level sulfuric acid facility has been delayed a bit. It now expects this to be complete in Q2 2024, instead of in Q1 2024.

Also, Martin noted that delays in the construction of semiconductor manufacturing facilities are expected to result in some customer demand for electronic-level sulfuric acid being deferred into 2025.

Accordingly, I have reduced my expectations for Martin’s 2024 results slightly. It may be able to do around $115 million in adjusted EBITDA in 2024, and around $120 million in adjusted EBITDA in 2025.

Notes On Valuation

Martin’s common unit valuation depends a lot on what multiple is used. A 5.0x EV to EBITDA multiple would result in a value of approximately $4.50 per unit. A 5.5x multiple would result in a value of a bit over $6 per unit. This is based on 2025 EBITDA expectations of $120 million and projected year-end 2024 net debt of $425 million. Martin has been making good progress with debt and leverage reduction, and from that perspective, it may be able to boost its distribution later in 2024. I generally expect it to boost its distribution in 2025 though, once its electronic-level sulfuric acid facility starts contributing more to its distributable cash flow.

Conclusion

Martin Midstream has made progress in reducing its debt and now appears capable of ending 2023 with $445 million to $450 million in debt, which would leave it at around 3.9x leverage. A solid amount of proceeds from the butane inventory selloff plus deferred 2023 capex has resulted in Martin’s year-end 2023 debt likely ending up around $20 million lower than I had previously expected.

While it still has a lot of debt, its credit facility doesn’t mature until 2027 and its notes mature in 2028. Martin appears capable of continuing to reduce its debt in the meantime.

Martin’s units should be worth around $4.50 with a 5.0x EV to EBITDA multiple and a bit over $6 with a 5.5x multiple. It may take a distribution boost for it to fully attain its upside though, and that distribution boost seems most likely to occur in 2025.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.